Journal of Financial and Strategic Decisions Volume 8, Number 2   Summer 1995 CONTAGION EFFECTS IN THE CHEMICAL INDUSTRY FOLLOWING THE BHOPAL DISASTER Rajiv Kalra Moorhead State University Glenn V. Henderson, Jr. University of Cincinnati Gary A. Raines University of Cincinnati Abstract This study examines the returns of Union Carbide and other chemical producers around the time of the Bhopal disaster. As might be anticipated, there were significant contagion effects. These effects were, however, economically small. There is also some evidence of over-reaction effect–larger initial losses moderated by later offsetting gains. For the firms other than Union Carbide, the later gains completely offset the initial losses.

Journal of Financial and Strategic Decisions Volume 8, Number 2   Summer 1995 EXPANSION INTO INSURANCE PRODUCT-LINES AND BANK SHAREHOLDER RETURNS Lawrence C. Rose San Jose State University Visitor, Massey University, NZ Dean G. Smith The University of Michigan The authors are grateful for suggestions from Andrew Thompson and session participants at the Midwest Finance Association Meetings where an earlier version of this paper was presented. We also wish to thank Michael Garner for his excellent research assistance. Abstract The prospects of Congress permitting bank expansion into insurance continues to concern bankers, insurers and investors. Based upon event study methods, abnormal returns to investors of banks engaging in currently permitted insurance activities are found to be significant over the 1974-1990 period. Further, disaggregated results suggest that there were significantly higher returns to more recent engagements, as compared to engagements prior to 1982.

Journal of Financial and Strategic Decisions Volume 8, Number 2   Summer 1995 GROWING COMPETITION IN CONSUMER LOAN AND DEPOSIT MARKETS: A CASE OF MARKET INTER-DEPENDENCE BETWEEN CREDIT UNIONS AND COMMERCIAL BANKS Matiur Rahman McNeese State University Douglas W. McNiel McNeese State University Roy P. Patin, Jr. Midwestern State University Abstract The paper seeks to examine the case of a plausible interdependence between large credit unions and commercial banks in an environment of growing competition in consumer loan and deposit markets. The theoretical results suggest the existence of market interdependence between these two financial intermediaries both under cost minimization and profit maximization by credit unions.

Journal of Financial and Strategic Decisions Volume 8, Number 2   Summer 1995 EXPLANATION OF INDUSTRY RETURNS USING THE VARIABLE BETA MODEL AND LAGGED VARIABLE BETA MODEL Thomas M. Krueger University of Wisconsin-La Crosse Mohammad H. Rahbar University of Wisconsin-La Crosse Abstract Beta is found to be a function of several leading economic indicators and government policy variables within the context of the Variable Beta Model which incorporates economic characteristics in the single archive_index model in a multiplicative manner. When contemporaneous macroeconomic descriptors are replaced with reporting-period-lagged macroeconomic descriptors, in the Lagged Variable Beta Model, model explanatory power increases. Findings suggest that the lagged beta model is more likely to satisfy the ordinary least squares assumptions of serially independent error terms.

Journal of Financial and Strategic Decisions Volume 8, Number 2   Summer 1995 THE IMPACT OF FIRM'S CHARACTERISTICS ON JUNK-BOND DEFAULT Sam Ramsey Hakim University of Nebraska, Omaha David Shimko University of Southern California We would like to thank Joseph Bencivenga of Salomon Brothers and Melvin Vukcevich of Kemper Securities Group for helpful comments. Abstract This study examines firm-specific value and risk factors as early predictors of junk bond default. Reduction in equity value, increased variation in long-term debt levels, and reductions in cash flow are found to be statistically significant indicators of higher default probabilities in a logit model. Variations in investment levels have insignificant explanatory power. The model provides individual investors with the ability to assess the default risk of high-yield securities based on the levels of observable financial variables.

Journal of Financial and Strategic Decisions Volume 8, Number 2   Summer 1995 THE 1986 TAX REFORM ACT AND STRATEGIC LEVERAGE DECISIONS Chenchuramaiah T. Bathala North Dakota State University Steven J. Carlson University of North Dakota Abstract The 1986 Tax Reform Act (TRA) repealed the investment tax credit, lowered corporate tax rates and lengthened depreciation schedules. These tax law changes have important implications for firms' strategic decisions regarding leverage and for testing DeAngelo and Masulis' tax shield substitution hypotheses. First, the effect of the TRA on firms' leverage, effective tax rates, and non-debt tax shields are examined. Second, the substitutability between debt and non-debt related tax shields is investigated within the DeAngelo and Masulis framework. The results of the paired t-tests, analysis of covariance, and regression analysis provide empirical support that, on average, firms have increased their leverage ratios during the post-TRA period. This increase is primarily in response to an increase in effective tax rates and a reduction in non-debt tax shields. This finding supports the view that firms tend to make strategic changes in leverage in response to tax law changes. Additionally, the evidence is consistent with two of DeAngelo and Masulis' hypotheses, H:3 and H:5.

Journal of Financial and Strategic Decisions Volume 8, Number 2   Summer 1995 AN EMPIRICAL EXAMINATION OF THE INFORMATION CONTENT OF BALANCE SHEET AND DIVIDEND ANNOUNCEMENTS: A SIGNALING APPROACH Said Elfakhani University of Saskatchewan I acknowledge invaluable comments by Larry J. Merville. Also, I thank the participants of the Northern Finance Association meeting for helpful comments on an earlier version of this paper. All errors are my own responsibility. Abstract This paper examines whether changes in financial statements and dividends can together provide a better information transmittal system to deliver missing private information on the firm. The dividend signal draws its value from three sources: its expected content favorableness, sign of dividend change, and type of signaling role. The signaling system can involve three corporate attributes: capital investment, financing, and agency decisions, all of which contribute to the firm's future cash flows. The findings show that the strength of market reaction to dividend announcement depends on the role of the dividend signal (confirmatory, clarificatory or unclear). The results also reveal that the market is more concerned with the news favorableness than with the sign of dividend change.

Journal of Financial and Strategic Decisions Volume 8, Number 2   Summer 1995 OVERFUNDED PENSION PLANS, EARLY TERMINATION, AND ASSET ALLOCATION STRATEGIES: AN OPTION THEORETIC APPROACH Joseph K.W. Fung Hong Kong Baptist College Kam C. Chan Moorhead State University Helpful comments from Larry Lawson are gratefully acknowledged. We are responsible for any remaining errors. INTRODUCTION The objective of this paper is to explain the reluctance of pension fund sponsors to terminate overfunded defined benefit pension plans (hereafter, pension plans). The paper extends the "pension put" option-theoretic approach of Sharpe [1976] and Bicksler and Chen [1985] to a "pension call" model to describe a general phenomenon of the unwillingness to terminate overfunded plans by their sponsors. Recently, Turner and Beller [1989] estimate that by 1987 aggregate pension assets were 125.7% of aggregate pension liabilities. This indicates that pension funds are overfunded. In addition, Alderson and Chen [1986], Haw, Ruland, and Hamdallah [1987], VanDerhei [1987], and Mitchell and Mulherin [1989] provide evidence that the terminations of overfunded pension plans can, indeed, produce positive statistically significant abnormal returns. Nonetheless, only 0.7% of all plans had been terminated as of 1987-accounting for a mere 9% of the excess plan assets (Mitchell and Mulherin [1989 p.43]). A question that naturally arises, then, is, "Why haven't more sponsors terminated their overfunded plans?" Some research has been done in this area with the focus on factors such as implicit labor agreements (Ippolito and Turner [1987]), tax abuse (Ippolito [1986]), financial distress (Mittelstaedt [1989] and Thomas [1989]), and efficient market (Ippolito and James [1992]).This paper offers an alternative explanation that does not base on neither external factors nor on termination costs. Instead, our "pension call" option-theoretic approach shows that it is economically sub-optimal to divest overfunded portfolios of risky assets. Besides, our model also provides implications on the allocation strategies of pension plans.

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